/ 10 January 2021

Africa trade bloc bets on business without borders

Loaded Containers Stacked On Top Of A Cargo Ship Sailing In A Canal, Suez Canal, Red Sea, Egypt
Vital corridor: The Suez Canal, one of the most heavily used shipping lanes, links the Mediterreanean and Red seas and serves as a maritime gateway for global trade. (Camille Delbos/Art In All of Us/Corbis via Getty Images)

In his message ushering in the new year, President Cyril Ramaphosa called the “birth” of the African Continental Free Trade Area (AfCFTA) “the start of a new era of trade between African countries”.

The AfCFTA, which kicked in on 1 January, is the largest free trade area to come into existence since the World Trade Organisation was formed in 1995. Exports between African countries currently account for between 15% and 18% of total exports.

With a population of 1.2-billion, a number that is expected to more than double by 2050, the trade agreement creates a $1.3-trillion single continental market intended to boost intra-Africa trade and economic growth. Achieving this requires eliminating almost all tariffs on traded goods.

The launch of the trade area was delayed because of Covid-19, which has battered economies around the world. And though the new year rang in the much-awaited start to trading, economists and researchers say there is a long way to go before the trade area’s vision is fully realised.

Economic policy researcher Nomahlubi Jakuja called the trade area “a huge undertaking”, given the size of the market and the complexity of the continent. “The bigger question is not the feasibility of the AfCFTA but the effectiveness of the market in reaching its intended goals,” she said.

One of the market’s challenges is that Africa has been divided into regional economic communities that have historically competed with each other, Jakuja said. Converging them and ensuring their compatibility “will be a huge challenge”.

She added that it would also be essential to ensure that “no one is left behind”. 

“Africa’s economies are mostly made up of small, micro and medium enterprises [SMMEs]. Ensuring that this group of companies meaningfully participate and benefit from the market will be a huge challenge that has to be deliberately tackled.”

For example, if cross-border trade costs remain high, the market will struggle to integrate smaller businesses, she said.

Another problem is that the asymmetry of the market means that countries with already established and sophisticated supply chains, such as South Africa, will probably benefit more than others. “This is something the AfCFTA will need to pay attention to for fairness and its sustainability,” Jakuja said.

In his statement at the opening ceremony, Wamkele Mene, secretary general of the AfCFTA secretariat, said if the trade agreement is implemented effectively, “we have the opportunity to lift out of poverty one hundred million Africans … It will be the opportunity to close the gender income gap, and the opportunity for SMMEs to access new markets.”

Jakkie Cilliers, head of African futures and innovation at the Institute for Security Studies, said efforts to fight the inequity between African economies might help pressure countries like South Africa to reduce their tariffs “asymmetrically”.

Trading started quietly on 1 January. “It is probably going to take a few years before we see a noticeable change,” Cilliers said. 

The process of reducing tariffs will take a minimum of five years, he said. The AfCFTA plans to eliminate more than 90% of tariffs by 2034. “So inevitably it is a slow and a bit of a painful process.”

Ambitious: Economic policy researcher Nomahlubi Jakuja describes the pan-Africa free trade area as a huge undertaking

Poor border control and infrastructure means “it will be very difficult to implement any of this”, Cilliers added. But he said once tariffs are eliminated, this will become less of a problem. 

Jamela Hoveni, an economist at Rhodes University, said trade policy — including tariffs and trade infrastructure — would be an important factor in determining the effectiveness of the AfCFTA. 

“When it comes to the flow of trade between African countries, we have to look at how there has been very little intra-regional trade as the legacy of colonialism,” she said.

“So the first thing we have to look at is what aspects of trade policy will help to boost intra-regional trade.”

Infrastructure is one obstacle to intra-regional trade, she added. “Because, if we look at the history and what colonialism has done, it was a policy that wasn’t meant to connect African countries. It was a policy that was aimed at extracting resources.”

Beyond infrastructure and tariffs, there is a need to analyse the demand for the products being produced by African countries and traded on the continent, Hoveni added. 

“If we look at demand and production capacity, then we are looking at what countries can do within their borders to promote intra-regional trade.”

Hoveni said that although it will still take some time to thoroughly ratify the agreement, the New Year’s Day launch was an important step. “For those countries that are yet to ratify the agreement, it encourages them in that direction. It shows them that the will and the intent are there actually to implement this agreement.”